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HOUSTON – Brent and US crude oil futures fell on Tuesday as traders grew less nervous about the potential for a wider war in the Middle East, with Iran yet to act on threats to retaliate against Israel for the assassination of a Hamas official in Tehran.

Benchmark Brent crude futures settled down USD 1.61, or 1.96% at USD 80.69 a barrel. US West Texas Intermediate crude finished down USD 1.71, or 2.14%, at USD 78.35 a barrel.

“The markets had priced in an imminent attack by Iran against Israel within 24 to 48 hours,” said Phil Flynn, senior analyst at Price Futures Group. “That hasn’t happened. The market is taking that risk premium out of the price for crude.”

The International Energy Agency kept its 2024 global oil demand growth forecast unchanged but trimmed its 2025 estimate, citing the impact of lackluster Chinese consumption on economic growth.

Brent on Monday gained more than 3%, closing at USD 82.30 a barrel after hitting the lowest closing price in seven months, USD 76.30, a week earlier.

Also on Monday, the Organization of the Petroleum Exporting Countries cut expected demand in 2024 even though the group and its allies, known as OPEC+, aim to raise output from October.

Escalation in the Middle East could endanger crude supply from a leading oil-producing region, but wider war seemed less likely as Iran suggested renewed cease-fire talks with Hamas could prevent retaliation.

“We’re seeing evaporation of the geopolitical risk premium,” said Jim Ritterbusch, president of Ritterbusch Associates.

The US has prepared for what could be significant attacks by Iran or its proxies in the region as soon as this week, White House national security spokesperson John Kirby said on Monday.

Markets also await Wednesday’s US consumer price index report that will give a crucial read on inflation.

(Reporting by Erwin Seba in Houston; additional reporting by Arunima Kumar in Bengaluru; Editing by Jason Neely, Mark Potter, Rod Nickel, and David Gregorio)

 

Global managed volatility funds saw their first net inflows for more than a year last month, as markets reacted to growing concerns over the economic outlook, uncertainty around monetary policy, and bubble-like valuations in the technology sector.

According to LSEG Lipper data, managed volatility funds, which aim to minimize risks and provide stable returns during periods of uncertainty, recorded their first net inflows in 14 months, attracting USD 601 million in July.

Analysts expect further inflows into these funds in the coming months, as market jitters, triggered this month by worries over US labor markets and an unwinding of billions of dollars of yen-funded carry trades, deepen.

Managed volatility funds typically put money into low-volatility stocks, or use strategies such as options arbitrage, to exploit price and volatility discrepancies across the options market.

Earlier this month, Wall Street’s “fear gauge,” the CBOE Volatility Index, reached its highest level in more than four years, while the bond volatility index, the ICE BofA MOVE Index, spiked.

Although both indexes have since settled lower, lingering economic worries and uncertainties about US rate cuts continue to feed concerns that markets may experience another round of extreme volatility in the coming months.

“The demand for managed volatility funds is expected to remain high through the end of the year. This is due to the upcoming US elections and potential economic instability, which only increase market fluctuations,” said Julia Khandoshko, CEO at international broker Mind Money.

“Investors tend to use these funds as hedging tools and to protect their portfolios in similar conditions of uncertainty.”

According to LSEG data, the Invesco S&P 500 High Dividend Low Volatility ETF, JPMorgan Nasdaq Equity Premium Income ETF, and Fidelity SAI US Low Volatility Index Fund had the most inflows last month, securing approximately USD 774.58 million, USD 588.77 million and USD 395.61 million respectively.

This month, the iShares Edge MSCI World Minimum Volatility UCITS ETF USD A, JPMorgan Managed Income Fund L and Invesco S&P 500 Low Volatility ETF have garnered USD 137.25 million, USD 119.49 million and USD 87.2 million respectively in flows.

(Reporting By Patturaja Murugaboopathy; Editing by Vidya Ranganathan and David Holmes)

 

Markets looked a whole lot more placid on Monday, a week after equities plunged and volatility measures spiked, but intensifying geopolitical tensions and looming economic data threaten to disrupt the relative calm.

The US benchmark S&P 500 ended virtually unchanged on the day, as gains in Nvidia and other tech stocks offset declines in most other sectors. The index is now down 5.7% from its July all-time high, recovering after being down 8.5% from its peak a week ago. MSCI’s gauge of stocks across the globe also was little changed on Monday.

The Cboe volatility index was last at 20.71 points, falling during the session to its lowest point since the start of the month. The VIX a week ago logged its largest-ever intraday jump and closed at over 38 points, its highest closing level since October 2020.

Part of Monday’s calm may have stemmed from a market holiday in Japan, with the country’s Nikkei index and yen currency at the center of the latest global storm in markets.

But investors were looking ahead: Wednesday’s US consumer price index report will give a crucial read on inflation with markets now worried that an overly depressed CPI number will fan fears of a downturn. A weaker-than-expected jobs report was one of the catalysts for the recent market selloff, as some investors suspect the Fed may be too late in cutting interest rates.

Tuesday’s report on US producer prices provides an inflation-data appetizer ahead of Wednesday’s main course.

Inflation also was top of mind in India, where data on Monday showed retail inflation fell in July to a near five-year low.

Tensions in the Middle East were keeping markets edgy. The US Defense Department said over the weekend it had ordered the deployment of a guided missile submarine to the Middle East as the region braces for possible attacks by Iran and its allies after the killing of senior members of Hamas and Hezbollah.

Oil prices jumped on Monday, with US crude settling up over 4%, on concerns the conflict would tighten global crude supplies. The US presidential race was also a focus.

Here are key developments that could provide more direction to markets on Tuesday:

– Singapore GDP (Q2)

– Japan corporate goods price index (July)

– US producer price index (July)

(Reporting by Lewis Krauskopf)

 

NEW YORK – Portfolio managers at hedge funds have retrenched from some of their riskier positions after a volatile week for markets.

A brutal selloff and recovery in global markets in the past week was triggered by the unwinding of billions of dollars worth of yen-funded trades and worries the US economy was heading to a recession. The CBOE Volatility Index ended at its highest close in nearly four years on Aug. 5.

The market rout has been painful for a number of hedge funds. Global macro quantitative funds posted losses between 1.5% and 2.5% between Aug. 1 and Aug. 5., while hedge funds focused on the technology sector were down between 2.5% and 3.5%, according to hedge fund research firm PivotalPath’s exposure model.

“We did see some degree of deleveraging,” said Edoardo Rulli, chief investment officer at UBS Hedge Fund Solutions, which invests in hedge funds. “Not panicking, but portfolio managers reducing positions.”

An unexpected spike in volatility is likely to suppress risk appetite until investors are more comfortable about global growth prospects, according to Sophia Drossos, economist and strategist at Point72 Asset Management.

“When you have a very long-term trade that starts to unwind very abruptly, it does hurt risk appetite. We’ll probably see an environment where investors remain reticent or skittish about taking on too much risk again,” she said. “It could be a headwind for the rest of the summer.” Drossos’ views do not necessarily reflect the hedge fund’s positioning, the fund said.

Leverage used by hedge funds to increase the size of trades is at a record high for the last decade, according to data provided by the Office of Financial Research’s Hedge Fund Monitor. Hedge funds registered in the US ended March with USD 2.3 trillion in borrowing from prime brokers, up roughly 63% from December 2019 and outpacing their assets’ growth.

There has been an unwinding of various positions in the last week.

Commodity-trading advisors (CTAs), or money managers that follow market trends, registered a “sharp unwind” of long equity positions, short yen, and short Japanese and 10-year German bonds starting after the weaker-than-anticipated US job data on Aug. 2, JPMorgan said in a note last week.

A Goldman Sachs’ prime brokerage note to clients also showed on Friday that long/short equity hedge funds have reduced their overall exposure to Japan to 4.8% last week from 5.6% the week before, while cutting overall portfolios’ leverage by almost a percentage point, to 188.2%.

US Commodity Futures Trading Commission and LSEG data released on Friday showed hedge funds’ position on the Japanese yen shrank to the smallest net short stance since February 2023 in the latest week, indicating investors have also wound down the yen carry trade.

MACRO CONCERNS

Front of mind now for portfolio managers – and contributing to portfolios’ de-risking – is the state of the US economy, as fears of a recession in the world’s largest economy mounted after the US unemployment rate jumped in July.

Rulli said macro hedge funds are also reconsidering some positions even though they made money during the market rout after being long US rates.

“Macro hedge funds still have conviction around the steepening of the yield curve, but they are taking some profits because obviously it’s done very well over the past four weeks, Rulli said.

Odds of the Federal Reserve cutting rates by 25 basis points or 50 basis points at its next meeting in September are close to the same, according to the CME FedWatch tool on Aug. 12.

“If there is a 50/50 chance between the Fed cutting 25 basis points and cutting 50 basis points, that is maximum uncertainty,” said Richard Lightburn, deputy chief investment officer at macro hedge fund MKP Capital Management. He has been considering potential adjustments in the portfolio to reflect the unknown environment.

“That’s telling you something – the market really doesn’t know what’s going to happen, and that means there’s going to be volatility,” he said.

(Reporting by Carolina Mandl in New York; Editing by Megan Davies and Andrea Ricci)

NEW YORK – Oil prices jumped by more than 3% on Monday, rising for a fifth consecutive session on expectations of a widening Middle Eastern conflict that could tighten global crude oil supplies.

Global benchmark Brent crude futures settled higher at USD 82.30 a barrel, gaining USD 2.64, or 3.3%. US West Texas Intermediate crude futures settled at USD 80.06 a barrel, up USD 3.22, or 4.2%. Brent saw its biggest percentage gain for a single trading session this year.

The US Defense Department said over the weekend that it will send a guided missile submarine to the Middle East as the region braces for possible attacks on Israel by Iran and allies.

“We’re piling assets one on top of the other and giving the impression that, if this turns hot, it could also turn ugly,” said Bob Yawger, director of energy futures at Mizuho in New York.

Iran and Hezbollah have vowed to retaliate for the assassinations of Hamas leader Ismail Haniyeh and Hezbollah military commander Fuad Shukr. An attack could widen the Middle Eastern conflict, while tightening access to global crude supplies and boosting prices.

Such an assault could lead the United States to place embargos on Iranian crude exports, potentially affecting 1.5 million barrels per day of supply, Yawger said.

Meanwhile, Israeli forces continued operations near the southern Gaza city of Khan Younis on Monday following an airstrike over the weekend on a school compound that killed at least 90 people, according to the Gaza Civil Emergency Service. Israel said the death toll was inflated. Hamas cast doubt on its participation in new ceasefire talks on Sunday.

“The market is increasingly concerned about a region-wide conflict there,” said John Kilduff, partner at Again Capital in New York. A broadening war could lead Israel to target Iranian oil and hamper crude output from other significant producers in the area, including Iraq, Kilduff said.

Brent gained 3.7% last week while WTI rose 4.5%, buoyed by stronger-than-expected US jobs data that fed hopes for an interest-rate cut in the world’s biggest consumer of crude oil.

“Support is coming from last week’s better-than-expected US data, which eased fears of a US recession,” said IG markets analyst Tony Sycamore.

Three US central bankers said last week that inflation appeared to be cooling enough for the Federal Reserve to cut interest rates as soon as next month.

Rate cuts tend to raise economic activity, which increases the use of energy sources such as oil.

Investors were looking ahead to US consumer price index data for July on Wednesday, which is expected to show month-on-month inflation ticked up to 0.2% after a minus-0.1% reading in June.

Oil prices drew support when consumer prices in China, the biggest global oil importer, rose faster than expected in July.

On Monday Russia evacuated civilians from parts of a second region next to Ukraine after Kyiv increased military activity near the border only days after its biggest incursion into sovereign Russian territory since the start of the war in 2022.

(Reporting by Laila Kearney in New York and Robert Harvey and Paul Carsten in London, Colleen Howe in Beijing, and Florence Tan in Singapore; Additional reporting by Shariq Khan; Editing by David Gregorio, Rod Nickel, and Nick Zieminski)